As long as illegal immigration is permitted, the foundations of American culture are at risk.Last week, President Donald Trump temporarily blocked both “immigrants and nonimmigrants” from seven predominantly Muslim countries from entering the United States. From the beginning of his presidential campaign he has spoken at various times and in a variety of ways of taking a step like this. Having done it, the action created uproar in part because it was done without adequate preparation, and in larger part, because it was done at all. The mutual recriminations over this particular act are of little consequence. What is important is to try to understand why the immigration issue is so sensitive. The uproar over Trump’s action is merely one of many to come, which also will be of little consequence.Trump has pointed to two very different patterns. One is immigration to the U.S. by Muslims. The other is illegal Mexican immigration. Both resonated with Trump’s supporters. It is interesting to consider other immigration patterns that have not become an issue. One is immigration to the U.S. from India. The other is immigration from China and other parts of Asia. Both have been massive movements since about 1970, and both have had substantial social consequences.Protesters gather at the Los Angeles International Airport’s Tom Bradley Terminal to demonstrate against President Donald Trump’s executive order effectively banning citizens from seven Muslim-majority countries. KONRAD FIEDLER/AFP/Getty Images

Indian migration to the U.S. has been one of the most successful in American history in that it has been among the least disruptive, has generated minimal hostility and has been extraordinarily successful economically. Today, Indian-Americans are the wealthiest single ethnic group in the United States. They are hardly invisible, as they are present in all professions and as corporate executives.Chinese and East Asian immigration is more complex. Chinese immigrants began coming to the U.S. in the mid-19th century. They came as laborers supplied by Chinese contractors and were crucial in building American railroads alongside – and in competition with – Irish immigrants. The Chinese were exploited and brutalized and didn’t get citizenship. But after the 1970s, their story matched the Indians’ – the Chinese were not quite as wealthy, but they did well.About 3.7 million people of Indian descent live in the U.S., many of them second-generation immigrants. About 4 million people of Chinese descent live in the U.S., with somewhat more complex backgrounds. There also are 3.3 million Muslims and 35.8 million people of Mexican descent, including an estimated 5.2 million of the 11 million who are in the U.S. illegally, according to Pew Research Center.If there was a strain of intense, anti-immigrant or racist sentiment in the United States, it would be directed against Indians and Chinese just as much as Muslims and Mexicans. There would also be a persistent strain from previous Irish immigration in the 19th century, and of Italians, Jews and other Eastern and Southern Europeans who flooded into the United States between 1880 and 1920. To the extent that racism exists against any of these groups, the anti-immigration fervor is marginal; century-old immigrant cohorts have become mainstream. They are not the ones marginalized – their detractors are.It is the example of the Chinese and the Indians that blows up the theory that Americans have an overarching anti-immigrant sensibility that Trump is tapping into. It also raises serious doubts that Trump is anti-immigrant. I have searched and may have missed it, but I didn’t find that Trump made anti-Chinese or anti-Indian statements, as opposed to anti-Muslim and anti-Mexican statements. If it were classic anti-immigrant sentiment, the rage would be against Indian immigrants who have emerged as a powerful and wealthy ethnic group in a startlingly short time. But there is minimally detectable hostility toward them, which means that the immigration situation in the United States is far more complex than it seems.The issue is not whether Trump and his followers are generally anti-immigrant. The question is why they are so hostile toward Muslims, who roughly total the same number as the Chinese and Indians, and to Mexicans, who vastly outnumber these groups. I wish the explanation were more complex, but it is actually quite simple in both cases.The United States has been at war with Muslim groups since Sept. 11, 2001. When the U.S. has gone to war with foreign powers, there has been a surge of hostility toward immigrants from that foreign power’s country. During World War I, German immigrants in the United States who still spoke German came under suspicion and were pressured to adopt English. During World War II, Germans who had maintained close and cordial ties to Germany prior to the war were harassed, and in some cases, arrested under suspicion of espionage and subversion. Japanese citizens of the United States were arrested and sent to detention camps out of fear that they might be conducting espionage or sabotage for the Japanese. During the Cold War, post-war émigrés from Soviet satellite nations were distrusted by the FBI, which feared they were sent by the Soviets as spies and saboteurs.When there is war, there is suspicion of the enemy. When there is suspicion of the enemy, there is fear that émigrés might be in the United States on false pretenses. Historically, émigrés have been caught in the middle to some extent because their loyalty is questioned. In war, there is rage as the casualties mount, particularly if sabotage and terrorism are carried out in the homeland. This is hardly new or difficult to understand. If those of us old enough to recall the terror after 9/11 will do so, we can remember the fear and uncertainty not only about what comes next, but also whether the next terror team already was present in the United States. After 15 years of war and many Americans dead, this has congealed into a framework of distrust that may well go beyond the rational. The detention of the entire Japanese community was not rational. Nor was it something that cannot be understood. It is hard to calibrate what you ought to be afraid of in war, but you know that something dreadful might happen. Are all Muslims warriors against the United States? No. Do you know who is or isn’t? Also no. Wars, therefore, create fears. There is nothing new in the American fear of Muslims in the context of war.The Mexican situation is different. There was a war, but it was long ago, and fear of war is not the driving issue. Rather, the driving issue is illegal Mexican immigration. There is a great deal of homage paid to the rule of law. Congress passed a law specifying the mechanics of legal migration. Some 5 million Mexicans broke the law. Whether this has harmed the U.S. economy or not, the indifference to enforcing the law by people who are normally most insistent on the rule of law has created a sense of hypocrisy. At the same time that the middle and lower-middle classes feel as though their interests are being ignored, the presentation of illegal aliens as “undocumented immigrants” reveals a linguistic maneuver. The “illegals” are transformed into the merely “undocumented,” implying a minor bureaucratic foul-up.The anger is not only directed at the Mexicans. It is part of the rage against those living in the bubble, who present themselves as humanitarians, but who will encounter the illegal aliens, if at all, as their servants. And rightly or wrongly, some suspect that open support for breaking the law is designed to bring cheap labor to support the lifestyles of the wealthy at the expense of the declining middle class. The fact that the well-to-do tend to be defenders of illegal aliens while also demanding the rule of law increases suspicions.There is a somewhat deeper layer. As long as illegal immigration is permitted, the foundations of American culture are at risk. It is not simply immigration, but the illegality that is frightening, because it not only can’t be controlled, but also the law is under attack by those who claim to uphold it. The fear that a person’s livelihood is being undermined and his cultural foundation is being overwhelmed creates deep fear of the intentions of the more powerful.The issue appears to have little to do with NAFTA and other economic concerns. The U.S. and China have equally intense economic issues, but there is minimal tension over Chinese immigration. The economic and immigration issues seem only tenuously connected.It is rare that an issue of such emotional impact as Muslims during a war with Muslims, or immigration in violation of the law, would not cause tension. As we saw with President Franklin D. Roosevelt and the Japanese, things that are obvious to those living decades later are not obvious at the time. Indeed, it is a failure of imagination to be unable to empathize with the fear felt after Pearl Harbor. In our time, the failure to empathize comes from those who feel immune to illegal immigration or the 15-year war. It is part of the growing fragmentation of American society that different classes and regions should experience these things so differently, and that each side has so little understanding of the other.It is the president’s job to bridge the gap. But regardless of his wishes, the president is trapped by the upwelling of feeling on questions of immigration by Muslims at a time of war, or the refusal of government at all levels to enforce the law. But what is not true is that this represents a generalized hostility to immigrants or even racism. If it did, the Indian and the Chinese immigration in recent generations would have encountered a very different greeting. This issue is about two groups. The response may well be extreme and clumsy. But after many years of ignoring the anxiety that both issues generated, or dismissing it as racism, it inevitably ratchets out of control. In fact, neither issue is mysterious, unprecedented or subject to cautious management, given the passions on all sides.

LONDON – Economic pundits traditionally offer their (traditionally inaccurate) New Year predictions at the beginning of January. But global conditions this year are anything but traditional, so it seemed appropriate to wait until US President Donald Trump settled into the White House to weigh in on some of the main surprises that might shake up the world economy and financial markets on his watch. Judging by current market movements and conditions, the world could be caught off guard by three potentially transformative developments.

For starters, Trump’s economic policies are likely to produce much higher US interest rates and inflation than financial markets expect. Trump’s election has almost certainly ended the 35-year trend of disinflation and declining rates that began in 1981, and that has been the dominant influence on economic conditions and asset prices worldwide. But investors and policymakers don’t believe it yet. The US Federal Reserve Board’s published forecasts suggest only three quarter-point rate hikes this year, and futures markets have priced in just two such moves.

As Trump launches his policies, however, the Fed is likely to tighten its monetary policy more than it had planned before the inauguration, not less, as the markets still expect. More important, as Trump’s policies boost both real economic activity and inflation, long-term interest rates, which influence the world economy more than the overnight rates set by central banks, are likely to rise steeply.

The rationale for this scenario is straightforward. Trump’s tax and spending plans will sharply reverse the budget consolidation enforced by Congress on Barack Obama’s administration, and household borrowing will expand dramatically if Trump fulfills his promise to reverse the bank regulations imposed after the 2008 financial crisis. As all this extra stimulus fuels an economy already nearing full employment, inflation seems bound to accelerate, with protectionist trade tariffs and a possible “border tax” raising prices even more for imported goods.

The only uncertainty is how monetary policy will respond to this “Trumpflation.” But whether the Fed tries to counteract it by raising interest rates more aggressively than its current forecasts imply, or decides to move cautiously, keeping short-term interest rates well behind the rising curve of price growth, bond investors will suffer. As a result, yields on ten-year US bonds could jump from 2.5% to 3.5% or more in the year ahead – and ultimately much higher.

In Europe and Japan, by contrast, monetary conditions will remain loose, as central banks continue to support economic growth with zero interest rates and quantitative easing (QE).

And this policy divergence suggests a second potential shock for which financial markets seem unprepared.

The US dollar could strengthen much further, especially against emerging-market currencies, despite Trump’s stated desire to boost US exports. The catalyst for exchange-rate appreciation would be not only higher US interest rates, but also a dollar squeeze in emerging markets, where foreign debts have increased by $3 trillion since 2010. A confluence of dollar strength and excessive foreign borrowing caused the debt crises in Latin America and Asia in the 1980s and 1990s. This time, Trump’s protectionism could make matters even worse, especially for countries such as Mexico and Turkey, which have based their development strategies on rapidly expanding exports and have financed domestic business activity with dollar debts.

So much for the bad news. Fortunately, a third major development that is not priced into financial markets could be more favorable for global economic conditions: the European Union – an even more important market than the US for almost every trading country apart from Mexico and Canada – could do much better than expected in 2017.

Economic indicators began to improve rapidly in most EU countries from early 2015, when the European Central Bank stopped the fragmentation of the eurozone by launching a bond-buying program even bigger than the QE pioneered by the Fed. But this economic recovery was overwhelmed last year by fears of political disintegration. With the Netherlands, France, Germany, and Italy all facing populist insurgencies – and at least the first three holding elections this year – the Brexit and Trump shocks have naturally provoked anxiety that the next domino to fall will be one of these EU founding members, followed perhaps by the entire EU.

These expectations create the possibility of the biggest surprise of 2017: instead of disintegrating, the EU stabilizes, facilitating an economic rebound and a period of strong financial performance similar to the US “Goldilocks period” from 2010 to 2014, when the economy recovered at a pace that was neither too hot nor too cold. The key event will be France’s presidential election, which will most likely be decided in a second-round runoff on May 7. If either François Fillon or Emmanuel Macron wins, France will embark on an economic reform process comparable to Germany’s in 2003, undertaken by then-Chancellor Gerhard Schroeder.

Even a mild foretaste of such reforms would encourage a relaxation of the austerity terms demanded by the new German government that emerges from the general election there on September 24. A more cooperative and constructive Franco-German relationship would, in turn, erode support for the populist Five Star Movement in Italy.

The risk to this benign scenario is, of course, that Marine Le Pen wins in France. In that case, a breakup of the EU will become a realistic prospect, triggering panic in European financial markets and economies. Every opinion poll and serious analysis of French politics indicates that President Le Pen is an impossible fantasy. But isn’t that what every opinion poll and serious analysis of US politics indicated last year about President Trump?

So much for that economic “boom” that President Obama was supposed to have left his successor. That has been the spin among Democrats and progressive economists, but Friday’s GDP report for the fourth quarter provided another in eight years of reality checks on the Obama economic record.The Commerce Department said growth clocked in at 1.9% for the last quarter of 2016, which was a major deceleration from 3.5% in the third quarter after three previous quarters of about 1.1%. The spin had been that a strong end of the year would leave President Trump with economic momentum, which after eight years of slow growth is like a runner who takes six hours to finish a marathon but sprints the last 25 yards. Yet even this supposed last Obama sprint was oversold, as consumer spending slowed and net exports were a drag after two quarters of contributing to higher GDP. One good sign was a modest increase in business investment after several dreadful quarters and historically weak capital investment throughout the Obama expansion.

Speaking of weak, growth for all of 2016 clocked in at 1.6%, the slowest since 2011 and down from 2.6% in 2015. That marks the 11th consecutive year that GDP growth failed to reach 3%, the longest period since the Bureau of Economic Analysis began reporting the figure. The fourth quarter also rings out the Obama era with an average annual growth rate of 1.8%, which is right down there with George W. Bush for the lowest among modern Presidents. Mr. Obama inherited a deep recession, but that makes the 2.1% growth average since the recession ended all the more dismaying. You have to work hard to suppress growth after a deep downturn, and Mr. Obama did that by putting income redistribution ahead of growth as a policy priority. He achieved the remarkable feat of slower growth and more inequality.Mr. Trump now has the chance to improve on this record, and the key this long (seven and a half years) into an expansion is business investment. Consumers can’t do much more than they have and the labor market is tight in much of the country. This means faster growth will have to come from liberating the trillions of dollars in capital that have been waiting for the political and regulatory climate to change. The promise of the GOP-Trump proposals on tax reform and deregulation have already stirred the stock market, and if they are implemented they could unlock a burst of capital spending and risk-taking.

A closing word to Trumpians who will point to the fourth-quarter decline in net exports that subtracted 1.7% from GDP. Part of the explanation is that a bumper crop of soybean exports boosted growth in the third quarter and then dropped off at the end of the year. This is not an argument for starting a trade war with China or Mexico, which could harm U.S. exports.

Imports are subtracted from GDP calculations to avoid overstating domestic production, but that doesn’t mean the U.S. should ban imports or run a trade surplus. Imports are vital to American prosperity, both as components for exports and affordable goods for consumers. They enhance the U.S. standard of living. Mr. Trump should keep his policy focus on growth, not on the meaningless trade balance.

Energy stocks jumped after the November election because investors thought new management in Washington would be their ticket to wealth. But what if it’s not?On the surface, the stars seem lined up for Big Oil & Gas. President Trump promised to reduce the industry’s regulatory burden and open more federal land and offshore areas to drilling.Furthermore, lower taxes and friendlier regulation will unleash animal spirits, boosting economic growth—and energy demand with it.Maybe it will all work that way, but simple economics tells me it won’t be so easy.

The Bullish Case for Energy

So here’s what we know: Energy production is a highly regulated industry, and Trump will make it less so. The president demonstrated this last week when he revived the Keystone and Dakota Access pipeline projects, which had been stalled by his predecessor.Also, Trump’s key appointees should be a boon for the industry:• Scott Pruitt, nominated to lead the Environmental Protection Agency, was the energy industry’s best friend as Oklahoma attorney general.• Former Texas Governor Rick Perry, Trump’s choice for secretary of energy, once advocated abolishing the very department he will soon lead.• Trump’s nominee for secretary of state, Rex Tillerson, was the CEO of ExxonMobil (XOM) and negotiated many overseas energy deals. US companies will no doubt gain new opportunities under his watch, maybe even in Russia.

Photo: Getty Images

Reducing compliance headaches will make life much easier for oil and gas companies. All other things being equal, it should translate into higher profits.There’s just one problem: All other things aren’t equal.

Supply & Demand

As the supply of a good or service goes up, the price rises and demand drops. When supplies fall, the opposite happens—demand rises and the price drops. That’s the law of supply and demand we all learned in economics class.

Photo: Wikimedia Commons

However, the seller’s cost to acquire the goods isn’t part of this equation. It is an indirect factor. Lower costs let sellers supply more, thereby pushing the unit price lower.This is the oil industry’s present problem. The very same factors that reduce their costs will also lead to higher supply. In the absence of higher demand, lower prices will follow.

Energy Intensity

So what about that demand growth? Will we use more energy in the coming years?Yes, says the new BP Energy Outlook, an exhaustive report from the former British Petroleum. BP thinks world energy consumption will grow 1.3% per year from 2015 to 2035.That’s impressive until you consider that it grew 2.2% a year from 1995 to 2015.Why? The amount of energy it takes to generate economic growth, or “energy intensity,” is shrinking fast. Today’s vehicles and technology are far more fuel-efficient than those of the past. BP believes world GDP can double in the next 20 years with energy usage growing only 30%.Worse, the demand growth isn’t happening here. It will be flat or even decline in the OECD countries (the US and other developed markets), with most growth happening in China, India, the rest of Asia, and Africa. You can see it in this chart from BP.The energy mix is changing too. Renewable sources like solar are growing fast in much of the world. Depending on location, in many places solar is now economically on par with fossil fuels, even without government subsidies. And these technologies will only improve.So if demand for oil, gas, and coal is flat or rising slowly, producing more of these energy sources will keep prices steady at best, and more likely push them lower.

Supply Glut

The left chart below, again from the BP report, shows global proved oil reserves growing steadily since 1980.Now, in reality the oil supply is not growing at all. Whatever is down there is what we have. So when we say supply is rising, we mean we’re finding more thanks to improved technology.The right chart ought to terrify energy bulls. Even if the entire world stopped exploring for oil right now, the amount we’ve already located is more than twice the cumulative projected demand from 2015 to 2050. So if you own some of those untapped reserves, this tells you to bring your oil to the surface as fast as you possibly can. Sell it to someone while they still have a use for it. Otherwise, you’ll be stuck with a stranded asset nobody wants.That’s what is happening too, despite the oil price falling sharply since 2014.Debt-financed energy producers keep producing even when the oil price is below their production cost, just to cover their debt service. They literally can’t afford to stop—and that’s capping the oil price in the $50–$60 range.Meanwhile, new technologies are pushing production costs even lower by automating the dangerous work formerly done by well-paid humans.• National Oilwell Varco (NOV), for instance, makes an “Iron Roughneck” that does the tedious, repetitive work of connecting drill pipe segments.• In offshore fields, submersible drones are doing much of the repair and maintenance work once done by human divers.• Nabors Industries (NBR) says its new automated drill rigs will cut down the number of workers needed at each site from 20 to just five.Lower production costs mean the supply curve can shift even more, letting producers supply the same quantity at a lower price. If that happens in a declining-demand environment, the price can drop even lower—and almost certainly will.Similar trends are underway in coal and natural gas. All these energy sources face abundant supply, falling production costs, and lower demand. In my book, that doesn’t add up to a sustainable bull market.Photo: Getty Images

Sunset for the Oil Patch?

I am not predicting doom for the energy sector by any means. There is still plenty of opportunity to earn good revenue and even boost it.But in the aggregate, the extractive energy sector faces serious headwinds, and there’s nothing President Trump and/or Congress can do to change it.If you’re a nimble trader, you might be able to extract some profits in the next year or two. I’ve recommended natural-gas pipeline plays in both of my publications, the income-focused Yield Shark and its big brother, Macro Growth & Income Alert, a premium alert service for advanced income investing.Opportunities exist—for now. Five or 10 years from now is a different story.If Donald Trump gets a second term as president, the energy industry will be dramatically smaller than it was when he started.See you at the top,

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.